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Franchise Law Update

Commentary on Business and Legal Issues of Franchising

Bad Facts Make Bad Law: Federal Court Suggests Franchisor Responsible for Broken Fryer

Posted in Legal Decisions

Before we move too far into 2015, it is important to mention briefly an additional case from the end of 2014 that, once again, calls into question the franchisor-franchisee model. Late last year the Federal District Court for the Southern District of Virginia denied Hardee’s motion to dismiss a claim for negligence and deliberate workplace injury.

The plaintiff is the estate of a former Hardee’s employee who suffered first and second degree burns after attempting to clean a broken fryer pump.   The plaintiff argued that the franchisor, Hardee’s, was (a) “in the business of operating and managing Hardee’s restaurants,” (b) that the fryer was broken for a significant amount of time, and (c) there were prior complaints about the problems associated with cleaning a broken fryer pump.   Using these facts, the plaintiff alleged that Hardee’s was responsible as an employer under state workers’ compensation law.  While workers’ compensation laws generally immunize an employer for workplace injuries, the plaintiff argued that an exception under the law applied because the defendants acted with deliberate intent.

Hardees argued that the plaintiff did not plead sufficient facts to show that it was an employer or that it knew of the unsafe working conditions.  The court disagreed, stating that plaintiff’s allegation that Hardee’s was in the business of operating and managing Hardee’s restaurants and the long length of the broker fryer were adequate facts to survive a Motion to Dismiss the deliberate workplace injury claim.  The court also refused to dismiss the negligence claim.  In the court’s opinion, Hardee’s argument that it did not assert the degree of control required for liability was rebutted by plaintiff’s allegations that the franchisor provided training, supervision and inspections of the restaurant, including its equipment and cooking supplies.

Understandably, the backlash from this case has been significant with some stating that this decision “reflects the outer, absurd limits of potential franchisor liability.”  Another article quotes an attorney stating “whatever the facts may be with regard to the franchisor/franchisee relationship, it is inconceivable that they extend to the franchisor’s alleged negligence with regard to a hot, dirty and broken restaurant fryer. That’s the kind of day-to-day working condition that has to be beyond a franchisor’s control.”

The case is ongoing and we will keep an eye out to see how it proceeds this year.   In the meantime, the case offers a lesson regarding the necessity for a franchise system to respond to claims with sufficient and specific arguments.   In the Hardee’s case, the District Court refused to address all the elements of the deliberate intent claim because it believed the defendants made only conclusory arguments.  Prior experience in the school of hard knocks tells us that no arguments can be taken for granted, and all must be carefully briefed. Whether that would have helped in a case where the court seemed determined to ignore the franchise business model is an open question.

Ukraine Finally Adopts Long-Awaited Franchise Regulations

Posted in International Franchising

After a decade-long wait, Ukrainian franchise regulations will become effective on April 21, 2015. The new regulations are a first step toward resolving uncertainty that has plagued Ukrainian franchises since 2004, when amendments to the Civil and Commercial Code of Ukraine introduced franchise-specific legislation.

The 2004 legislation was relatively innocuous: it required franchisors and franchisees to register their franchise agreements (including amendments and terminations) with the local state office that originally registered the Ukranian franchise. Absent registration, franchisors and franchisees could not enforce their franchise agreement against third parties. However, until recently, no regulations provided the nuts and bolts of how to register a franchise agreement.

registerIn the interim, franchise agreements were deemed valid between the parties to the agreement, but invalid vis-à-vis third parties. For example, tax authorities–either considering themselves third parties or simply refusing to acknowledge the unregistered franchise agreement–attempted to reduce tax credits resulting from payments made under franchise agreements. Attempting to mitigate the uncertainty, franchisors and franchisees incurred greater transaction costs by concluding additional agreements, such as equipment, supply and service contracts and license agreements.

But on October 21, 2014, the veil was (at least partially) lifted. The Ministry of Justice published Order No. 1601/5 (the “Order”), setting forth the procedures for registering franchise agreements. Some highlights include:

  • The Order takes effect on April 21, 2015.
  • Registration will be performed by the State Registration Service of Ukraine.
  • Applications may be filed in person, by mail or electronically.
  • Registration is free and decisions should be issued within 5 working days from filing.
  • Documentation confirming the existence of the franchisor’s intellectual property rights must be filed along with the registration. Unfortunately, however, the Order does not clarify what documentation should be filed if a franchisor’s trade secrets are subject to the franchise agreement.

While some uncertainties remain, the Order provides long-absent clarity and protection to franchise relationships in the Ukraine.





This Renewal Season, Don’t Forget the New Multi-Unit Commentary

Posted in Business Updates

Renewal season is upon us and, for franchisors with fiscal years ending December 31st, don’t forget that requirements of the Multi-Unit Commentary issued by NASAA in 2014 must be met by Spring 2015.   The full Commentary can be accessed here.

One of the clarifications/changes which the Commentary provides–and compliance with which may require substantial work–is that disclosure for unit franchise programs and area representative programs may no longer be combined in a single Franchise Disclosure Document or a single state registration.  Instead, those programs must be disclosed and registered in separate FDDs.   This means a franchisor that has previously combined both programs into one FDD must revise the existing  FDD to disclose only the unit franchise program.  The franchisor will need to create a separate FDD for the area representative offering and file for a new registration for that program.

Renewal and amendment filings will be reviewed for compliance with the Multi-Unit Commentary.   The Commentary also sets forth preferred terminology and clarifies what information must be included in FDDs–such as in the case of a subfranchisor (also commonly known as a Master Franchisor), which may be different than a franchisor’s current practice.

For those who have not been following this issue, we urge you to consider our prior post on this subject.

Are You Adequately Protected If Your Franchisee Does Something Stupid?

Posted in Business Updates

Contributed by Christina A. Stoneburner

We have recently posted about the increase in complaints filed with the National Labor Relations Board alleging that franchisors and franchisees are joint employers. There have also been several cases in the last few months where employees tried to argue that they were the franchisor’s employees so as to claim unpaid wages under the Fair Labor Standards Act (“FLSA”).  Employees and their attorneys can be very creative when trying to locate additional sources of settlement funds.

Joint employment is a concept that is not limited to claims under the National Labor Relations Act or the FLSA.  Claims that two different entities are joint employers can arise in discrimination claims brought under Title VII of the Civil Rights Act and the Americans with Disabilities Act.  The regulations enforcing the federal Family and Medical Leave Act (“FMLA”) actually specifically address joint employers and their obligations under the FMLA.

As employees continue to push the limits of who is and who is not an “employer” under these statutes, franchisors may be asking themselves what to do to protect them from liability.  First, it should be noted that the mere existence of a franchisor/franchisee relationship does not automatically create a joint employment relationship.  Although federal circuits differ somewhat in the relevant factors to consider, usually the determination boils down to whether the franchisor has control over hiring, firing and discipline of the franchisees’ employees.

If you are a franchisor that does exercise control over your franchisees’ employees there are three key things that you can do to protect yourself:

  1. Have written policies of harassment and insure that your employees and the franchisees’ employees are trained on complying with the policies;
  2. Have an effective complaint procedure.  It is not enough to tell employees that you do not tolerate discrimination and harassment. You must insure that complaints are promptly addressed and where necessary, the appropriate remedial action is taken; and
  3. Check your and your franchisees’ insurance coverage.  Employment Practices Liability Insurance (“EPLI”) coverage is available to cover employment related claims including wrongful termination, discrimination and harassment.

There are still many employers that do not realize that EPLI coverage is even available.  You may be aware of EPLI and even have coverage for claims raised by your employees but none whatsoever for claims raised by your franchisees’ employees.  This may be because of the way “employee” is defined within the policy in that it excludes any employee not directly on your payroll.

One option is to purchase a third-party endorsement to your EPLI coverage, which would provide coverage in the event that a third-party claims that your employee harassed him or her. It can be sticky, however, where a franchisee employee alleges that he or she is your employee as this is not the normal “third party” claim for which most policies provide coverage.

A solution to this potential problem is to require that franchisees that have EPLI coverage purchase a franchisor endorsement that provides coverage to the franchisor in the event that one of the franchisees’ employees files a claim against the franchisor.

The beginning of the year is a perfect time to make sure you start off 2015 on the right foot. In order to ensure that you have adequate protection, you should review your EPLI policy, especially the exclusions to those policies, to determine if additional endorsements need to be purchased.  You may also want to review the best options with your insurance broker.

House Passes “40 Hour” Legislation to Modify the Affordable Care Act

Posted in Legislative Updates

On January 8 2015, the US House of Representatives passed H.R. 30, the Save American Workers Act, with a final vote of 252-172. The bill, which would reform the definition of “full-time employee” in the Affordable Care Act to the industry-standard 40 hours per week.  The bill was one of International Franchise Association’s top legislative priorities.

The More Time for Full Time Initiative, a coalition of leading business groups, played an instrumental role in lobbying Congress to support this legislation. Companion legislation, S. 30, the Forty Hours is Full Time Act, was reintroduced in the Senate on January 9, 2015 with bipartisan support.

Proponents of this legislation point to evidence that employers are reducing the number of hours offered to employees to 29 per week in order to avoid the obligations under Affordable Care Act, which they argue will harm the employees the law is meant to help.

Please see our prior blog posts on this subject.  We will continue to keep you updated on the progress of this legislation.

Social Media Practice Pointer after Genghis Grill Contest: Avoiding Negatively Publicity Online

Posted in Business Updates, Food Service

Last month’s issue of the Franchise Times contained an interesting article about the issues that may arise when a franchise system uses online contests to drum up business.

Genghis Grill, an Asian stir-fry quick service food concept, sponsors an annual weight loss contest called “Health Kwest.”  The franchisor chooses contestants who compete to lose weight while eating one free meal a day at Genghis Grill in the hopes of losing the most weight and winning a $10,000 grand prize.   Genghis Grill started the contests in 2011 and, according to the Franchise Times, it is a “social media hit” generating hundreds of blog posts, Instagram photos and Twitter posts each year.

The problem?  Disgruntled contestants are using the same social media outlets to blast the contest and are quickly gearing up to publicize even more negative feedback when the annual contest resumes this month.   The “health” aspect of this “Healthy Kwest” had been called into question with one former contestant even alleging that a winner lost 65 pounds by overdosing on stimulants and using other unhealthy methods to lose weight such as starting himself.

According to the article, the franchisor’s Chief Marketing Officer, Ron Parikh, downplays the negativity stating that the Health Kwest shows contestants how to adopt a more active lifestyle and adopt more healthy choices.   Mr. Parikh did say that, based on the recent feedback, the franchisor would “be updating the rules to reflect healthy weight loss practices and the new FCC guidelines.”

It is unclear whether the backlash will have any lasting negative effect on the Genghis Grill brand or taint this year’s upcoming contest.   As noted above, former contestants remain eager to expose what they call Genghis Grill’s unethical practices.

This is a reminder to all franchise systems to carefully think through all rules for any sponsored online contests, taking particular care to ensure they comply with FCC guidelines, and address all issues or problems upfront and honestly.   Genghis Grill may have avoided some of the continued anger by former contestants if the contestants felt that the mistakes made in overseeing  last year’s contest were properly addressed.

NLRB Office of General Counsel Declares War on Franchising

Posted in Business Updates, Regulatory Compliance

On December 19, 2014, the NLRB Office of General Counsel issued 13 complaints alleging that McDonald’s and its franchisees violated the rights of employees working for franchisees.  Key to these complaints is the opinion of the Office of General Counsel that McDonald’s and its franchisees are “joint employers” of the employees of franchisees.  At its core, the Office of General Counsel is moving to eviscerate the current standard for a finding of “joint employer,” specifically that the employer must meaningfully affect matters relating to employment relationship such as hiring, firing, discipline, supervision and direction.  Instead, the Office of General Counsel wants to replace the well-understood standard of “meaningfully affect” with the, in my opinion, nebulous standard of “sufficient control”–even if that so-called “control” does not include power or authority of the franchisor to hire, fire, discipline or supervise a franchisee’s employees.

Make no mistake. The NLRB’s decision to issue complaints against McDonald’s, claiming it is a joint employer with its franchisees, is a direct, existential threat to the future of franchising. Not franchising “as we know it”, but to franchising period. As regular readers of this blog know, we have been intently following the actions of the NLRB. For further reading, I highly recommend an ALERT written by some of my colleagues regarding this very serious matter.

Dishing the Details 2: FAQs for the New FDA Vending Machine Labeling Rules

Posted in Food Service, Legal Decisions, Regulatory Compliance

Last week, we discussed the FDA’s new menu labeling rules for restaurants. The final rule also requires certain vending machine operators to disclose calorie information for food sold from vending machines.

Vending Machine Labeling Rules

Who is covered?

The final rule applies to a person who is engaged in the business of owning or operating 20 or more vending machines.

“Vending machine” is defined as “a self-service machine that, upon insertion of a coin, paper currency, token, card, or key, or by optional manual operation, dispenses servings of food in bulk or in packages, or prepared by the machine, without the necessity of replenishing the machine between each vending operation.”

When must vending machine operators comply?

Vending machine operators affected by the new rule must comply by December 1, 2016.

How do vending machine operators comply?

Vending machine operators can determine calorie content for foods sold in their vending machines from the food package’s Nutrition Facts Label, the manufacturer or supplier of the food, nutrient databases, cookbooks, or laboratory analyses.

If consumers are able to examine the Nutrition Facts label before purchasing a vending machine item, or if they are otherwise able to view nutrition information at the point of purchase, as specified in the final rule, then vending machine operators are not required to provide further calorie information.

Otherwise, vending machine operators must declare the caloric value of such foods. In general, calorie declarations can be posted on a sign close to the article of food or selection button. The sign need not be attached to the vending machine, but a calorie declaration must be visible at the same time as the food, its name, price, selection button, or selection number is visible. Like menu labeling, calorie declarations on vending machines must comply with similar type size, color and contrast requirements.

What Does the President’s Executive Action on Immigration Really Mean?

Posted in Articles, Food Service, Industry Updates, Regulatory Compliance

Contributed by Robert S. Whitehill

The Executive Action announced by President Obama on November 20, 2014 has stirred a great deal of excitement in the immigration space: some positive, some negative.  Despite a lawsuit challenging the lawfulness of the action and Congressional threats to defund a portion DHS’s budget, DHS is proceeding to implement the executive initiatives.

DHS predicts that within 90 days of the issuance of the executive order, new DACA (Deferred Action for Childhood Arrivals) policies will be in place to expand the program.  To date, DACA has been limited to applicants who are under 31 years of age and meet other requirements.  According to DHS, prior to February 18, 2015, the DACA age limit will be expanded to include individuals born prior to June 15, 1981 who have been continuously residing in the US since January 1, 2010.

DHS also predicts that within 180 days (i.e., by May 19, 2015) of the issuance of the executive order, a new deferred action program, DAPA will go live.  Among other requirements, this will provide deferred action to an undocumented person who, on November 20, 2014 was the parent of a US citizen or permanent resident child.

Neither these enhancements to deferred action is yet available.  For those to whom these might apply, DHS advises those individuals to gather their identity documents, proof of their relationship to a US citizen or permanent resident child and of their continuous residence in the US for at least the last five years.  DHS also warns that there will be scammers who will promise things that they can’t provide.  As there will be a USCIS (United States Citizenship and Immigration Services) filing fee, individuals thinking of filing should save some money for that purpose.

The decision to file for deferred action needs to be made on a case-by-case basis and USCIS makes its decisions on a case-by-case basis.  For those 500,000+ childhood arrivals who were granted DACA deferred action, the grant gave them employment authorization and relief, albeit temporary, from removal from the US.  DACA has given employers access to additional authorized workers and DAPA should provide millions more.

Dishing the Details: FAQs for the FDA’s Final Menu Labeling Rules for Restaurants

Posted in Food Service, Industry Updates, Regulatory Compliance, Uncategorized

The U.S. Food and Drug Administration recently released two long awaited food labeling rules. The first requires “chain” restaurants and similar retail food establishments to list calorie information on menus and menu boards. The second requires vending machine operators to list calorie information on vending machines. The purpose of the new rule is to make “nutrition information available to consumers in a direct and accessible manner to enable consumers to make informed and healthful dietary choices.” It implements the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010 (Affordable Care Act).

Menu Labeling Rules

What businesses are covered?

To be covered by the final rule, a business must be a restaurant or similar retail food establishment. This is generally defined as a retail establishment that offers for sale “restaurant type food” (see below). In addition, the business must:

  1. be part of a chain of 20 or more locations in the United States,
  2. doing business under the same name, and
  3. offering for sale substantially the same menu items.

The final rule covers a variety of businesses, such as traditional sit-down restaurants as well as quick service, take out/drive through, and delivery establishments. Facilities offering food in entertainment venues, colleges and universities, cafeterias, coffee shops, superstores, grocery and convenience stores are also covered assuming they satisfy the criteria listed above.

The final rule also requires disclosure of calorie information of food from vending machines (see below).

“Restaurant-type food” is generally defined as food usually eaten on the premises, while walking away, or soon after arriving at another location and either (i) served in the establishment, or (ii) processed and prepared primarily in the establishment. In addition to more commonplace examples (such as sit-down meals or take-out food), this can include items at a bakery or coffee shop, self-serve food from a salad bar, and popcorn at a movie theater.

Alcoholic beverages are covered if they are standard menu items that are listed on a menu or menu board. In certain instances the final rule is more flexible for beer and wine and allows for a calorie range to be displayed rather than an individual calorie count.

When must businesses comply?

Businesses affected by the new rule must comply by December 1, 2015.

What must businesses do?

Businesses are required to determine and disclose to consumers the nutritional content of the food they serve.

Covered businesses must:

  1. disclose calorie information on menus and menu boards for standard menu items*;
  2. post a succinct statement concerning suggested daily caloric intake on menus and menu boards**; and
  3. post on menus and menu boards a statement that written nutrition information is available upon request***.

*“Menus” and “menu boards” are defined as “the primary writing of the covered establishment from which a customer makes an order selection.” These include breakfast, lunch, and dinner menus; dessert menus; beverage menus; children’s menus; and online menus. Calorie information for standard menu items must also be declared on signs adjacent to foods on display and self-serve foods.

**The statement must read: “2,000 calories a day is used for general nutrition advice, but calorie needs vary.”

***Upon request, covered businesses must be prepared to provide to consumers the following written nutritional information for standard menu items: total calories, calories from fat, total fat, saturated fat, trans fat, cholesterol, sodium, total carbohydrates, fiber, sugars, and protein.

How can businesses comply?

Businesses are required to have a reasonable basis for the nutrient content they declare. They can determine nutrient values via nutrient databases, cookbooks, laboratory analyses, the Nutrition Facts Label on packaged foods, or use other reasonable methods. Businesses must take reasonable steps to ensure that the way food is prepared and the portions they serve adhere to the factors used to determine and disclose the nutrient values.

Businesses may have to substantiate their disclosures. If the FDA requests, a business must provide information that substantiates its published nutrient values, including the methods and data it used.

Additionally, there are requirements for how businesses list the calorie content of each standard menu item: The number of calories on the menu or menu board must be listed

  1. next to the name or price of the associated standard menu item;
  2. in a type size no smaller than the name or price of the menu item, whichever is smaller;
  3. in the same color used for the menu item’s name (or a color at least as conspicuous); and
  4. with the same contrasting background used for the menu item’s name (or a background at least as contrasting).

Similarly, the succinct statement must be posted:

  1. prominently and in a clear and conspicuous manner;
  2. in a type size no smaller than any calorie declaration appearing on the same menu or menu board;
  3. in the same color used for the calorie declarations (or a color at least as conspicuous); and
  4. with the same contrasting background used for the calorie declarations (or a background at least as contrasting).

What’s on the menu for affected businesses?

The FDA’s final rules are highly detailed and include substantiation and enforcement provisions. Additionally, businesses covered by the final menu labeling rule have less than a year to comply. Experienced counsel can help businesses understand whether they are affected and, if so, how best to satisfy the new standards. Next week, we’ll look at how the rules impact vending machines.